Mergers & Acquisitions asked Michael Gruber, managing partner at Salveo Capital, to share his thoughts on how the mid-term elections will affect M&A and the cannabis sector. For more on M&A trends in cannabis, read the guest article written by Salveo's Jeffrey Howard: How to seize M&A opportunities in marijuana’s gray market.

How will Democrats’ winning control of the U.S. House of Representatives affect the financial services industry in general and private equity and M&A in particular?
The Democrats’ win in the House should be significant. First of all, Republican Pete Sessions of Texas, failed in his re-election bid for Texas’ 32nd Congressional District. Sessions had been one of Congress’ most powerful and vocal marijuana prohibitionists. Representative Sessions used his position as Chairman of the House Rules Committee to block House floor members from voting on a significant number of marijuana amendments during his leadership tenure. His removal as an impediment to legislation should have an impact whether it be allowing veterans to have medical cannabis access, increasing banking access for cannabis businesses, preventing Federal interference on state compliant companies, and more. The other big bombshell today was that Jeff Sessions is out as Attorney General. Sessions was clearly never a fan of the cannabis industry, and although federal agencies were largely de-funded to do much enforcement, his negative stance always cast a dark shadow over operators, and more than anything, he spooked investors from a comfortable position. The investment community has been looking for greater clarity as to how the Federal government will get involved with cannabis operations in each state, and with mixed messages, and a lack of access to traditional banking services, there has been a cloud over the industry. With new leadership in the House and with Sessions gone, a more hands-off approach from the federal government is an easier bet to make, and investors will most definitely get more comfortable with making an investment in cannabis related companies. Salveo Capital has gotten more comfortable over the last few years, and we clearly see an even much brighter future ahead, and where we see an opening for increased medical research on cannabis as well as loosened restrictions on banking being key to help drive this industry growth.

As a dealmaker, which regulatory issues are you paying the most attention to, and how are they likely to be affected by Democrats’ controlling the House?
The Rules Committee, Appropriations Committee, and House Financial Services Committee will likely be some of the most important committees relating to the Democrats’ control of House and where there could be significant positive movement in support of the cannabis industry. Key issues will continue to be related to a variety of issues: decriminalization of marijuana; full federal legalization of marijuana, rescheduling or rescheduling of marijuana, veterans access to medical cannabis, enabling banking access for cannabis companies, and opening up of increased ability to do medical research on cannabis. As you look at any of these initiatives either on their own or together, they can dramatically change the landscape and investment climate for the cannabis industry. And as these changes get effected and put into place by Congress, there is a high likelihood that we will start to start an increase in large US companies announcing more aggressive steps to enter the industry.

Now that the mid-term elections are over, has your sentiment about dealflow changed? Has it improved, declined, or stayed the same? Why?
At Salveo, we have an incredible amount of dealflow already, and there are way more deals to review than we have time. We believe deal flow will likely increase more, and we believe that a number of entrepreneurs and managers who may have been more risk-averse in the past, may start coming out of the shadows to either announce new companies to take advantage of the tremendous opportunity in cannabis, or you will see them join existing companies, and provide additional credibility to these companies.

Do you think dealmaking in 2019 will be higher, lower, or the same as 2018? Why?
As described, Salveo Capital believes that there will be an increase in deal flow in 2019 based on this more favorable environment on the regulatory side. In addition, we will continue to see the wave of more states legalize either through ballot or legislative initiatives. With an amazingly strong public support for legalization and a risk-off feel for federal enforcement, companies in general will be both more comfortable in entering this space, but also investing money for growth and scale. As such, we will start to see more institutional capital coming into the sector, and we believe there will start to be a new wave of consolidation in the industry driven by well-capitalized companies within the cannabis industry first, and then by large traditional vertical players who now realize that they have to have a cannabis story to remain relevant. Salveo has positioned itself amazingly well with its portfolio in having ownership stakes across the entire supply chain of cannabis, and with exposure across the country. We are excited about the road ahead in 2019, and the strong results that come with it. The late day news of Sessions leaving the Attorney General’s office clearly makes being involved in this industry more attractive, and we immediately witnessed this as we have already had a good number of inbound e-mails come in to Salveo today from investors that say that they want to take a more serious look at the space, especially with the departure of former AG Sessions. The market has turned…. and the wind is clearly behind our backs! Let’s just hope that the new Attorney General is more forward thinking around cannabis than the predecessor.

Deal flow Election 2018